Depoorter (1999) indicate that a natural monopoly exists in an industry where a single firm can produce output at a lower per unit cost than two or more firms can. Electricity industry is a good example of such an…
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For the electricity industry, increase in business can greatly reduce unit/average costs and that is why natural monopoly is popular in this industry.
In most cases, government might want to regulate natural monopolies such as this one. The regulations to be employed are direct legislation and administrative regulations of prices and entry into the industry (Joskow & Rose, 1989). Several reasons exist on why the government might do this. The two major ones are to prevent consumer exploitation and increase in the unit/average cost of production. Since, in natural monopoly there is absolutely no competition, the monopoly can sell its products at any price. This could result to consumer exploitation hence attracting the interest of the government to regulate monopoly. Moreover, since such industries have no competition, other investors might venture into it to break the monopoly. By doing this, they would increase the cost per unit hence rendering production uneconomical. The government will therefore step in to regulate their operations with an interest of saving the
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The researcher states that perfect competition is whereby there are many buyers and sellers dealing with homogeneous products and no participant has the power to determine the price or quality of a product. Monopolistic competition is whereby there are many firms selling similar but not identical products.
It is these market structures which determine the behavior of the firm in that industry. Perfect competition is on one extreme of the spectrum. Although it may not exist in our world today it plays an important role as a model to study when analyzing levels of competition.
So the goal of the firm is profit maximisation. We shall study the two types of markets – perfect competition and monopoly, and discuss why in the long run the former earns normal profit but the later earns more than that. Perfect competition is a type of market which fulfils all these five assumptions.
One needs to find a trade off to maximize his utility. Besides that, there are several hindrances which force him to make rational decisions while apportioning resources effectively. This principle segregates market into two extreme continuums of market structure which are Monopoly and perfectly competition.
As monopoly proceeds, the consumers will ultimately forego the product, especially consumers who value the product or service more than they value its cost. This tends to create a deadweight loss. The deadweight loss also indicates that the combined surplus for the monopolists and the consumers is always lower than that for perfect competition.
Which form of market is better can be subject matter of discussion and is controversial issue. Perfect market is the starting point around which other market forms should revolve or regulated. The case study of Microsoft Corporation with its monopolistic product in application software used in every computer is given below to highlight the model of Monopolistic from of market.
Firstly, a perfect competition situation comprises of a large number of small firms that compete with each other and produce at minimal costs for every unit. Secondly, a monopoly does not have rivals in the industry. It minimizes output to
The researcher of the given essay explains whether the allocative and productivity efficiency can be achieved in both markets (perfect competition and monopoly). In the light of these, market structure is defined as a framework in which a firm chooses to enter the market.
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